Home>News> Crisis-hit economy shrinks by nearly 10% in 2015, but contraction bottoms out throughout the year

Ukraine GDP Q4 2016

Ukraine: Crisis-hit economy shrinks by nearly 10% in 2015, but contraction bottoms out throughout the year

March 24, 2016

Ukraine’s economy contracted a notable 9.9% in 2015, the worst result since 2009, as the military conflict in the east of the country fueled a double-digit fall in industrial production, skyrocketing inflation and a large amount of capital flight. On the bright side, after hitting rock bottom in the first quarter of the year, the economy bottomed out and improved notably by Q4. According to official data released by State Statistics Service Ukraine, GDP fell 1.4% annually in the final quarter. This was a sharp improvement from the 7.2% decrease in Q3 although the result was worse than the preliminary estimate of a 1.2% contraction and reflects a low base of comparison. The economy showed signs of ongoing stabilization as the result was broad-based, with all components improving.

The domestic economy continued to improve in Q4, although dynamics are still weak. Fixed investment rebounded from a 6.3% contraction in Q3 to a 1.4% expansion in the fourth quarter, which marked the best result since Q1 2013. Government consumption also rebounded and expanded 8.1% (Q3: -1.7% year-on-year). Exchange rate stability and the ceasefire agreement’s relative success in containing military clashes have been supporting an improvement in economic data. However, private consumption still recorded a deep contraction, falling 13.0% (Q3: -19.3% yoy) as austerity measures and weakened purchasing power squeeze households.

The external sector contribution’s also improved in Q4 as falling imports outpaced exports. Imports plummeted 17.3% in Q4, which followed Q3’s 18.2% drop. The UAH’s plunge has caused import demand to drop and the low-commodity-price environment has also reduced the cost of key imports. Meanwhile, exports contracted 5.8%, which was a more moderate drop compared to the 10.8% fall recorded in Q3. While exports to Russia, one of the country’s main trading partners, have plummeted since the onset of the crisis, the lower UAH and a shift in trade partners has supported exports. As a result, the external sector’s contribution to growth rose from 3.6 percentage points to 6.4 percentage points.

While news surrounding the economy is encouraging, Ukraine’s political space remains in shambles. Political tensions reached a breaking point in February as government infighting over the pace of reforms and corruption allegations led to a surprise statement from President Petro Poroshenko calling for Prime Minister Arseniy Yatsenyuk to resign. While Yatsenyuk survived the subsequent no-confidence vote, two small parties left the governing coalition and a new cabinet still must be approved. The political deadlock has held up already sluggish reform implementation, which is slowing the next bailout review and the country has not received a disbursement from the IMF since August.

Against this backdrop, FocusEconomics panelists expect GDP to expand 1.3% in 2016, which is up 0.1 percentage points from last month’s forecast. For 2017, panelists expect the economy to accelerate to a 2.7% expansion.

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